December 2009

Gold Struggling through its Most Acute Correction since the Financial Crisis

North American Commodity Update

Commodities – Energy

Crude Oil Finds Little Comfort from a Drop in Inventories, Bear Trend Matches Worst Trend in Years

Crude Oil (LS NYMEX) -  $70.64  //  -$1.98 //  -2.70%

It was a volatile day for trading crude Wednesday as the commodity was jostled by a weakened US dollar, unstable trends in sentiment and a highly anticipated inventory report. Following the API’s report of a sharp, 5.816 million barrel drop in oil inventory yesterday (the largest decline since the period through September 5th), there was a strong case for a relief reversal on the basis of supply-and-demand fundamentals where most price action has developed through underlying investor sentiment. However, the US Department of Energy’s numbers would prove less persuasive than the industry group’s figures. According to the government report, crude holdings in the week through December 4th through 3.823 million barrels against expectations of a 250,000-barrel increase. On the surface, this may seem a clear rebalancing of a market that is plagued with excess inventory and anemic consumption. However, the details of the report attest to the permanence of the fundamental disparity. Looking into the details of the report, the Cushing region (were the NYMEX traded West Texas Intermediate grade is stored) reported an 8 percent increase in stores for the biggest increase since the week through January 2nd to the highest overall level since early August. This more than offsets the 3.9 percent drop in stores for the Gulf of Mexico region. What’s more, both gasoline (2.253 million barrels) and distillates (1.619 million barrels) reported inventory increases. On the other side of the equation, daily fuel demand averaged 18.5 million barrels a day over the previous four weeks – down 3 percent from the same period a year ago.

Alone, an inventory glut could be weathered by a market that has shown a greater sensitivity to risk trends through the year. However, sentiment  has taken a clear course adjustment over the past week. While the dollar was down on the day and the Dow Jones Industrial Average ended higher, investors were once again shaken by downgrades on Spain’s outlook, a slew of Dubai’s companies and reminders of the US and UK warnings. At this point, speculative interests are showing a greater influence on price action than any other factor. With today’s slump, crude is down six consecutive sessions, matching the worst trend since the period through July 8th. It is worth noting that the market hasn’t seen a series of more than six consecutive daily losses since September of 2006. Adding to the signs of bearish conviction among traders, volume on the active NYMEX futures contract has hit its highest level since February 6th and the weekly (five-day) average is at its highest level since June of last year.

Commodities – Metals

Gold Struggling through its Most Acute Correction since the Financial Crisis

Spot Gold  -  $1,123.90  //  -$4.50 //  -0.40%

Gold struggled to produce a positive close through Wednesday’s session; but all the volatility aside, the general bearing on price action is unmistakable. The precious metal is developing its most meaningful correction since April; but we haven’t seen such an intensity in a correction since the last gasp plunge during the worst of the financial crisis last year. For the session, bulls would find little encouragement from the bearings on risk appetite, the US dollar or inflation (covering three prominent roles of gold). Investor sentiment was marred by another day of ratings concerns. Following the downgrade on Greece’s sovereign credit rating yesterday; Standard & Poor’s downgraded its outlook for the Spanish economy from “stable” to “negative” and Moody’s cut the credit ratings on six of Dubai’s companies. Further degrading speculator strength, China announced taxes on housing sales to curb turnover and there are reports that the Banking Regulation Commission will act to limit new lending to 7 to 8 trillion yuan through 2010 to prevent uncontrollable asset bubbles. Clearly, conditions for unchecked speculation on the back of government support are coming to an end. As for the commodity’s role as a dollar and inflation hedge; the greenback stalled Wednesday but the inflation-linked iShares TIPs fund dropped to a near month low.

Spot Silver  -  $17.23  //  -$0.29 //  -1.65%

Silver’s trend is enviable. The bearish drive has been extended for a fifth consecutive session and momentum has flagged little through its maturity. Spot is now firmly set between the closely monitored $18 and $17 figures. For fundamental interest, the dollar’s lack of progress helped establish volatility and limit the extension of the metal’s unfavorable trend. However, the broader slump in risk appetite has clearly diminished the appeal of holding a security that lacks the capital appreciation potential of volatile gold and the yield of assets like fixed income and stocks. For speculative interest iShares Silver Trust (the largest ETF backed by the commodity) reported no change in holds at 9,514.25 tons while aggregate volume and open interest have both eased since the steady advance through the end of November. This points to a more restrained decline than gold or crude.

Discuss gold and oil trading with other traders in the DailyFX Forum

Written by John Kicklighter, Strategist
Questions or Comments about this article? Send them to jkicklighter@dailyfx.com

US Stocks Close Higher as Economic Growth Limits Credit Concern

U.S. Session Key Developments

•    Fall in Metal Prices Continues
•    Dollar Weakness Fails to Lift Commodities
•    Inventories Rise for First Time in 14-Months

US markets ended the volatile session higher following weakness throughout much of the day. Early on, dollar weakness and a rise in wholesale inventories could have set the tone for a stronger session, but this was met with pressure in financials and weakness across the commodity space. Indeed, concerns over sovereign credit ratings has become a serious focus once again, as S&P cautions on downgrades ahead in Europe, while Fitch has already taken action in Greece. Moody’s continues to hold to the tone that the US and UK’s AAA ratings remain “resilient” but this viewpoint will only hold if growth is strong enough to cause a shift in fiscal responsibility, along with higher tax revenue to offset mounting debts. Ultimately, traders see the US economy as able to grow quickly in the fourth quarter and initially in 2010, with expectations of GDP to be well ahead of the Euro-Zone. This optimism has led to less of a concern in the domestic financial sector, while the government maintains its intent to keep fiscal and monetary policy from tightening in the near-term. Fed chief Bernanke maintains his cautious stance on rate hike expectations, while the Obama administration now appears to be in the initial planning stages of a de-facto third stimulus using money allocated for the Troubled Asset Relief Program. TARP is expected to see more money returned in the coming year than initially forecast, and losses are also expected to decline. As such, Congress is in the midst of discussions on effective ways to use some of this money to support job growth ahead of an important election in 2010 to control politics. Overall, the S&P500 has remained in a very tight range of approximately 36 points, or 3%, since mid-November, and a period of consolidation is taking place. Direction remains unclear going into the year-end.

DJIA 30                      10,337.05                   +51.08               +0.50%
The Dow closed higher by half-of-one percent as gains were noted in just over half of stocks while all but two sectors closed in the green. Stocks leading today included innovative product maker 3M, up 3.41% as Citigroup advised buying the shares. Health Care also moved higher with Pfizer and Merck up more than two percent each as the Senate made new compromises that may not include an immediate “public option”  Ultimately the Dow remains well off its recent highs with consolidation similar to that of the S&P500.

S&P 500                     1,095.95                   +4.01                 +0.37%
The broader S&P500 index closed higher with a smaller mover than the Dow as gains were noted in most stocks while Basic Materials led with a rise of 1.56%. Big leaders today included a 4.03% move in Apple, as Piper Jaffray reiterated its optimism in the iPhone. Of the ten largest firms, only IBM and Apple, technology stocks, posted moves of one percent or more.

NASDAQ                    2,183.73                    +10.74             +0.49%
The NASDAQ closed higher by approximately half a percentage point as all but sectors gained with Basic Materials up 1.82%. A near equal number of stocks closed lower while Apple led the index, up more than 4% as Piper Jaffray remained positive on the iPhone. Consequently, rival Blackberry maker RIMM also gained at 4.87%.

Written by Roman Kadinsky, CFDTrading Research
Please send any comments about this report to Rkadinsky@fxcm.com

European Markets Continue to Fall as Credit Concerns Fuels Risk Aversion

Europe Session Key Developments

• Commodities Lower Despite Dollar Weakness
• Crude Falls on Rise in Inventory of Gasoline
• Sovereign Credit Ratings in Question

European markets ended the session lower following significant volatility as indices bounced between gains and losses throughout the day. Overall weakness was stirred by news events, even as fundamental indicators including U.K. Confidence and German trade figures remained strong. Key highlights include the British Exchequer imposing a 50% tax on bank bonuses, while further concerns in sovereign credit ratings hampered optimism. Following Monday’s announcement by S&P to a negative outlook on Greece, Fitch Ratings took a quicker step and issued a full-on cut, raising the value of credit-default swap contracts on government bonds. Today saw follow-through with S&P adding a negative outlook to Spain’s debt rating, a move that led the IBEX35 to drop sharply by more than 2%. Not helping the general atmosphere was further downside in commodities with oil racing towards $70 to the lowest level since early October, while gold’s collapse continued, lower by more than one hundred from its recent peak. Overall, the environment in equity trading appears to have started to shift following the US Non-Farm Payrolls last Friday. The release clearly showed improvement in the world’s largest economy and has led traders to move forward their expectations for rate hikes. Tighter monetary policy could limit potential upside in stocks, while economic growth is still likely to have a positive effect going forward.

FTSE 100             5,203.89              -19.24 -0.37%
British stocks fell the least of the five majors, down just over a third of a percent as losses reverberated across all but the Basic Materials sector. Nearly 75% of stocks traded lower with insurer Old Mutual down the most at 5.63% followed by hedge fund Man group, off 3.92% on news that net asset values declined. Ultimately Barclays led the index decline, as shares of the firm dropped 3.27% as financial aversion continued. Overall, further appreciation in the US dollar may be a significant hindrance on the FTSE as the proportion of affected raw material producers would be a drag on the benchmark index.

CAC 40                 3,757.39 -27.91              -0.74%
French equities closed lower by nearly three-quarters of a percent as financials led the index lower while four sectors fell more than one percent each. Losses were noted in 34 of 40 stocks with insurer Axa down the most at 3.98%. Across Europe, banks and insurance are feeling pressured as credit ratings for sovereign debt may be revised. This has considerable implications for financial sectors as cost to insure debt increases and potential losses may rise.

DAX                        5,647.84               -40.74               -0.72%
German stocks fell across the board with losses in more than 75% of stocks while all sectors fell, with the exception of Basic Materials. Industrials fell the most, down 1.79% while financials also dropped 1.53%. Indicators of Germany today showed the trade surplus increase significantly, due to a decrease in Imports. The fall may be a sign that domestic demand remains questionable and that economic growth is largely fueled by exports and global recovery from emerging nations.

IBEX 35               11,541.20              -267.70                   -2.27%
The Spanish index fell sharply to the largest decline of the five majors as rating agency S&P issued a negative outlook on the nation’s debt. The move sent nearly all stocks lower, with Financials down 3.56%. Builder Sacyr Vallehermoso fell the most with a loss of 4.46%. The nation’s two largest banks, Santander and BBVA fell more than three percent each to cause a drop of more than 150 index points.

FTSE MIB            22,236.23            -168.09               -0.75%
Italy’s benchmark index fell for the third consecutive day while ending near the mid-point of its range. Pressure in the financial sector due to credit concerns in Greece and Spain may see follow-through with issues in Eastern Europe, a region Italian lenders have held a hefty hand. The economy of Italy has started to grow, with GDP and PMI data indicating expansion in the third quarter that is likely to continue through the year end. As the index remains heavily financial weighted, weakness in major banks could lead to underperformance in the FTSE MIB.

Written by Roman Kadinsky, CFDTrading Research
Please send any comments about this report to Rkadinsky@fxcm.com

Euro Nears Important 1.4625 Level

Euro / US Dollar

The advance from 1.4625 is complete as an ending diagonal and a break of that level is expected soon.  5th wave channel support and a trendline from the March low have been broken as well.  Once the 5 wave decline from 1.5150 is complete, a pullback towards 1.4910 is expected.  It is on that rally that I’ll look to short.

British Pound / US Dollar

Price action in the GBPUSD since mid October may be carving out a head and shoulders top.  From a wave standpoint, moves since the top at 1.7050 (August 5th) are in 3 waves.  As such, either a triangle, flat, or leading diagonal is underway since then.  All 3 patterns point lower near term.  Having broken through support, expectations are for additional weakness.  Levels that could provide support are 1.6115, 1.6030, and 1.5735.  Shorts can move risk down to this  morning’s spike high (above 1.6380).

Australian Dollar / US Dollar

Like the EURUSD, the AUDUSD has broken below trendline and 5th wave channel support.  Focus in now on .8900 (which also serves as the neckline to a potential head and shoulders top).  The rally that failed just shy of .9200 may have completed a small second wave.  A pop above there in order to complete a more complex correction is not out of the question however.

New Zealand Dollar / US Dollar

Since the top at .7640, NZDUSD declines are impulsive (5 waves) and rallies are corrective (3 waves).  The decline below .7080 signals an end to higher lows.  Structure is bearish below .7530 although price ideally remains below .7305.  .7200 is short term resistance.  A break of.7020 would shift focus to .6900, then .6600.

US Dollar / Japanese Yen

After breaking above trendline resistance in Friday, the USDJPY has declined all the way back to former resistance at 87.50.  One would expect at least a bounce from this juncture.  Near term resistance points are 88.70-89.00 and 89.70.

US Dollar / Canadian Dollar

Price pattern since 1.0875 is not impulsive to the downside.  The probability favors the idea that the decline since late October is a larger correction.  1.0300 is potential support (100% extension) (although the print below 1.0415 does satisfy minimum expectations for wave y).  Keep perspective-the decline from 1.3068 does count as a double zigzag correction and that the pair has built a base since the October low.  The USDCAD may be in the early stages of a 3rd wave rally.  Trading above 1.0875 would confirm as much.

US Dollar / Swiss Franc

The USDCHF is in the same positions as the EURUSD.  The rally from Friday’s low is impulsive.  Structure is bullish above .9960 and supports are 1.0135 and 1.0080.  Trading above 1.0340 would expose 1.0525/90.

Jamie Saettele publishes Daily Technicals every weekday morning, COT analysis (published Friday evenings), technical analysis of currency crosses on Monday, Wednesday, and Friday (Euro and Yen crosses), and intraday trading strategy as market action dictates at the DailyFX Forum.  He is the author of Sentiment in the Forex Market.  Follow his intraday market commentary and trades at DailyFX Forex Stream.   Send requests to receive his reports via email to jsaettele@dailyfx.com.

Asian Stocks Extend Decline on Growth Fears; Japan’s 3Q GDP Expands 1.3%

Asia Session Key Developments

• China Pledges to Increase Regulator Supervision
• Fujii Says it’s Important to Keep Fiscal Discipline
• Australia’s Consumer Confidence Tumble on Rising Borrowing Costs
  

The Asian equities markets plunged on Wednesday as Fitch Ratings cut Greece’s credit rating, while China Banking Regulatory Chairman Liu Mingkang said the government will “strictly control lending” and “increase regulator supervision” in an effort to avert an asset bubble. At the same time, Japan’s Finance Minister Fujii said Japan can contain bond sales below 44 trillion yen, while also noting it is important to keep fiscal discipline. Nevertheless, the final GDP reading for Japan reinforced a weakened outlook for future growth as the growth rate was revised down to 1.3% from an initial forecast for a 4.8% expansion in the growth rate, and policy makers may continue to provide support to the real economy as global trade conditions remain subdued. Meanwhile, Australia’s Westpac consumer confidence index tumbled 3.8% in December after falling 2.5% in the previous month, while home loans slid 1.4% after rising a revised 3.3% in September. Moreover, Australia’s trade deficit widened to A$2.379M in October from A$1845, led by a decline in iron ore and coal exports.

Nikkei 225                          10,004.72

The Japanese equity markets traded lower for a second consecutive day, leading the Nikkei 225 to tumble 135.75 points (1.34%) and close at 10,004.72. Nine of the ten components traded lower on the day, with oil & gas plunging 2.41% to lead the decline, while utilities surged 0.11% to taper the decline. Shares of Aeon, Japan’s largest supermarket retailer climbed 3.02% as the company said it will sell its stake in U.S. clothing chain Talbots, while Suzuki Motor advanced 3.49% as Volkswagen AG looks to take a 20% stake in the firm, according to Reuters. At the same time, Nissan Motor Co slumped 3.40% as the automaker announced plans to invest EUR 160M to build a plant in northern Portugal, which will produce batteries for electric cars, while Pioneer Corp rallied 3.24% after launching a joint-venture with Shanghai Automotive Industry Corp to produce car navigation systems in China.

Hang Seng                        21,741.76

Hong Kong shares closed to the downside on Wednesday for a third straight day to mark a one-week low, leading the benchmark equity index to shed 318.76 points (1.44%) and end the trade at 21,741.76 as 8 of the 9 components traded lower on the day. Shares of China Overseas Land tumbled 3.1% as the Xinhua News Agency said China’s government will temper “speculative” home purchases, while Sun Hung Kai Properties tipped 0.26% lower following the report, which cited National Development and Reform Commissioner Chairman Zhang Ping. In addition, Industrial Commercial Bank of China shed 1.5% as China Banking Regulatory Chairman Liu Mingkang said it will “strictly control lending to industries that are energy-intensive, polluting and have overcapacity, and raise the quality of lending,” while PetroChina lost 1.65% as oil prices weakened for the fifth day.

S&P/ASX 200 Index           4,637.90

Stocks in Australia traded lower on the back of falling commodity prices, with the S&P/ASX 200 shedding 32.70 points (0.70%) on Wednesday to close at 4,637.90.  Nine of the ten components traded lower on the day, with oil & gas tumbling 1.75% to lead the decline, while telecommunications added 0.77%. Shares of Newcrest Mining, the country’s largest gold producer slid 1.62% as gold posted its largest three-day fall since October 2008, while Alesco slumped 8.74% subsequent to the company forecasting a 29% fall in first-half earnings. At the same time, Karoon Gas added 3.45% as the company said its venture partner ConocoPhillips will purchase an extra 9% stake in two exploration permits, while Caltex Australia, the nation’s biggest oil refiner shed 4.11% as the company held a weak growth outlook for the first half of 2010.

Notable Asian Session Event Risk / Economic Releases

NASDAQ Testing Short Term Trendline Support

As is often the case in Elliott, the picture is becoming much clearer as the rally has matured and nears its end.  The advance from the March low is a complex W-X-Y (a-b-c-x-a-b-c) rally.  Notice the broadening formation since August.  Broadening patterns almost always signal tops (called ending diagonals in Elliott terminology).  Levels to watch for resistance are 10365 and 10495 (100% extension).

The Dow continues to trade along trendline resistance which is steering the blue chip index toward a test of 10,581-61.8% Fibo of 13,136-6,469. However, 10,500 has been a formidable level which increases the likelihood of a retrace back toward support at 10,000 with potential to trendline support.

The S&P is in a similar situation to the Dow.  The count from the March low is the same but the recent surge that propelled the Dow to a new high has yet to do the same for the S&P.  A broadening formation from the August low is evident here as well, which again does warn of a top.  A new high exposes 1110.30 (top of gap from October 2008 in December contract), then 1134 and 1159 (100% extension) in the index.

The S&P 500 has started to trade heavy after failing to break above resistance at 1,120- 50.0% Fibo of 1,576- 666 opening the door for a test of trendline support near 1,060. A break above the Fibo level exposes 1,150.

The NASDAQ pattern is the same as the S&P pattern in that the index has yet to make a new high.  The more volatile index also broke a support line and dropped below its October low (red line) – something that the other indexes failed to do.  Clearly, the technical situation for bulls is deteriorating.  A new high would expose 2341 (100% extension).

The NASDAQ continues to trade after finding short-term trendline resistance, opening the door for a test of trendline support near 2,090. However, the tech-laden index is up against short-term trendline support which could limit further losses.

Crude Oil Prolongs it Worst Bear Trend in Five Months on Risk Aversion

North American Commodity Update

Commodities – Energy

Crude Oil Prolongs it Worst Bear Trend in Five Months on Risk Aversion

Crude Oil (LS NYMEX) -  $72.62  //  -$1.31 //  -1.77%

Crude fell for a fifth consecutive day Tuesday, extending the worst trend for the commodity since early July and measuring accumulating a 7.35 percent decline over the period. Looking for the impetus for such a discouraging trend; there was a considerable range of macro and market-specific data with which to work with; but sentiment proved to once again take the helm on the struggling asset. For traders in every risk sensitive asset; the top headline for the day was a warning from Moody’s that the United States and United Kingdom (two of the world’s largest economies) could test the stability of their Aaa sovereign credit ratings (the highest available. And, though the rating agency said it was unlikely that an actual downgrade was unlikely; an actual reduction to Greece’s national rating by Fitch as well as a reported second half loss from Dubai World’s real estate branch would offer a consistent outlook for inherent risk in the market. From the markets, those assets that purport capital returns on risk appetite would subsequently tumble and those that offer safe harbor from financial storms (like the US dollar) would rally.

If sentiment were not a factor today, fundamentals may have actually supported crude today. For supply-and-demand statistics, the weekly API data has set an impressive pace for Wednesday’s more market-moving DoE figures. According to the American Petroleum Institute, US crude inventories in the week through December 4th plunged 5.816 million barrels – the biggest drop since the period ending on September 5th. Considering the Bloomberg consensus for the government’s numbers tomorrow is calling for a comparatively restrained 250,000-barrel increase, there is potential for a significant surprise. In the meantime, the Department of Energy would release its December forecast figures. An outlook for the average price to hold around $78.67 is a modest increase from the $78.13 projected in the previous month; but the 2010 consumption figures would offer a little more to work with on a decrease in expectations for total fuel consumption of 0.2 percent to 96.78 million barrels a day. In macro news, the NIESR UK growth estimate for November reported positive growth for the first time since May of 2008; but this was offset by worst than expected activity in German and British factory activity.

Commodities – Metals

Gold’s Speculative Ties Overwhelm Sovereign Rating Concerns

Spot Gold  -  $1,128.40  //  -$29.70  //  -2.56%

Gold had attempted a recovery through the first half of Tuesday’s session; but a plunge through the afternoon hours of the US session would push the commodity to its lowest level in three weeks and worst three-day performance in nearly 14-months. Through the morning, the precious metal was attempting to find a bid through the news that Greece’s national credit rating had been lowered and both the US and UK were testing the “boundary” of their respective designations. For investors, this pressure would spell a direct threat to the government debt and currencies for those particular economies and subsequently increase the safety value of the commodity. However, gold’s current level and its potential for volatility must both be considered too great as traders would ultimately shun the asset in favor of the technically depressed US dollar. The greenback advanced 0.57 percent on a trade-weighted basis Wednesday and has climbed nearly 2.5 percent since last week. Just a month ago, the outcome of this mix of data would likely have sent the metal higher; but the potential for further returns on a speculative asset that is already pushing record highs is starting to be viewed as a contradiction in concept. For speculative interest the SPDR Gold Trust (the largest ETF backed by the precious metal) trimmed holdings by 13,72 tons or 1.2 percent to 1,116.25 tons. If central banks are indeed planning net purchases of gold going forward to diversify away from currencies like the dollar, this pullback should bolster interest.

Spot Silver  -  $17.59  //  -$0.60 //  -3.30%

Silver was suffering a significant drawdown of its own Tuesday – though its losses were more constrained than those of its more expensive counterpart. The commodity fell for the fourth consecutive day to push its losses to 8.6 percent – the largest correction since the October 28th pull-back. More importantly, the market is once again below $18/ounce – a critical level since October. The dollar’s advance was the most prominent catalyst to silver’s losses today. With the warning to the United State’s credit rating and a reported loss from one of Dubai World’s companies; a slump in risk appetite would weigh interest in the metals complex and leverage the safe haven appeal of the greenback.

Discuss gold and oil trading with other traders in the DailyFX Forum

Written by John Kicklighter, Strategist
Questions or Comments about this article? Send them to jkicklighter@dailyfx.com

Asian Stocks Plunge on Growth Concerns, Japan Unveils 7.2 Trillion Stimulus Package

Asia Session Key Developments

• Japan Increases Spending to Support the Recovery
• Japan’s Trade Balance Unexpectedly Widens
• Australian Business Confidence Soars to 7-Year High
  

The Asian equities markets slumped on Tuesday as Fed Chairman Ben Bernanke held a cautious outlook for the world’s largest economy, while policy makers in Japan unveiled a JPY 7.2 trillion stimulus package in an effort to aid the tepid recovery. The accompanied statement said that “risk factors include a deterioration in employment conditions, sluggish demand because of deflationary pressure, a rise in long-term interest rates and movements in the currency markets,” and the government will allocate the 7.2 trillion package as followed. 3.5 trillion will go into Japan’s regional economies, with 600 billion towards aiding the slump in the labor market, and 800 billion targeted to environmental initiatives. Meanwhile, Japan’s trade balance widened to 949.0B yen in October from 599.2B yen the month prior as policy makers around the world continued to support the global economy, while Australia’s business confidence surged to a 7-Year high, stirring further speculation that the Reserve Bank of Australia may raise the benchmark interest rates to 4.25% by March.

Nikkei 225                          10,140.47

The Japanese equity markets posted its first decline in seven days, leading the Nikkei 255 to slip 27.13 points (0.27%) and close at 10,140.47. Five of the ten components traded lower on the day, with financials tumbling 1.57% to lead the decline, while utilities soared 1.38% to taper the fall. Shares of T&D Holdings tumbled 5.36% as Merrill Lynch lowered the life insurer’s 12-month price estimate to JPY 2,600 from JPY 3,100, while Nippon Yusen K.K. slumped 5.65% as the Baltic Dry Index, which measures the cost of shipping commodities, slipped 1.7% during the previous day. Moreover, Nippon Sheet Glass Co shed 3.03% after Credit Suisse cut the firm’s price target to JPY 360 from JPY 520, while Denki Kagaku Kogyo K.K. added 2.99% as Citigroup Global Markets Japan raised its rating on the stock to “buy” from “hold.”

Hang Seng                        22,060.52

Hong Kong shares closed to the downside on Tuesday for a second successive day, leading the benchmark equity index to shed 264.44 points (1.18%) and end the trade at 22,060.52 as 7 of the 9 components traded lower on the day. Shares of Aluminum Corporation of China tumbled 2.39% on the back of lower commodity prices, while Foxconn International Holdings, the world’s largest contract manufacturer of mobile phones slipped 2.77% as Fed Chairman Ben Bernanke held a cautious outlook for future growth. At the same time, HSBC Holdings, which obtained 24% of its 2008 revenue from the U.S. fell 1.95% following the comments from the central bank head, while PetroChina shed 1.42% as crude oil prices slipped for the fourth day.

S&P/ASX 200 Index           4,670.60

Stocks in Australia traded lower on the back of lower commodity prices, with the S&P/ASX 200 pushing 5.90 points lower (0.13%) on Tuesday to close at 4,670.60. Eight of the ten components traded lower on the day, with technology tumbling 1.79% to lead the decline, while basic materials added 0.50%. Shares of Duet Group gained 1.10% as the UBS raised the company’s stock rating from “neutral” to “buy,” while Paperlinx, Australia’s largest papermaker leapt 8.82% as Merrill Lynch and Credit Suisse Group upgraded the stock to “buy” and “neutral’ respectively as the company announced plans to shut down or sell its manufacturing operations in Tasmania. Meanwhile, Asciano Group advanced 3.86% as the company reaffirmed it signed its fifth queensland coal-haulage customer, while iSoft Group plummeted 3.45% as Linwar Securities downgraded the company from “outperform”  to “market perform.”

Notable Asian Session Event Risk / Economic Releases

Oil Prices Break Support, Gold Rebound May Continue

Commodities – Energy

Oil Prices Break Support, Hinting Bearish Momentum to Accelerate

Crude Oil (WTI)       $74.16       +$0.23       +0.31%
Oil prices have broken below major support at the bottom of a falling channel established from October’s high above $80. A rising trend line from the lows in February has also fallen by the wayside. The bears will now have to work towards the lower boundary of the $72.86 – $75.13 congestion region, with a break below that opening the door for a run to test the psychologically significant $70 level. On the fundamental side of things, crude inventory data from the American Petroleum Institute is the only item of significance on the economic calendar. The overall trajectory of risk appetite and US Dollar are also not to be overlooked.

Commodities – Metals

Gold Rebounds as Expected, Further Gains May be Ahead

Gold       $1162.88       +$4.78       +0.41%
Yesterday, we suggested that positive RSI divergence was hinting at a near-term bullish bounce off support at $1137.57, the 11/27 low, to test resistance at resistance at $1167.10. Indeed, this is precisely what materialized, with prices now coming off that resistance at this point. An inverse Head and Shoulders bottom may be forming above $1137.57, but confirmation is still required on a break above $1167.10. The fundamental outlook remains dominated by the forecast for US interest rates, and with no major data on the US docket yesterday’s comments identifying “formidable headwinds” for the US economy by Fed chairman Ben Bernanke may boost prices.

Silver       $18.27      +$0.08       +0.44%
Silver has broken higher out of a falling channel set from the swing high in early December. Near-term resistance is seen at $18.35. Fundamentally, the landscape is much the same as that of gold, with the US rates outlook being of primary importance.

Central Bank Rate Decisions Outlook

Federal Reserve Rate Decision Outlook:
Rate hike expectations for the Federal Reserve remain muted as commentary by Chairman Bernanke and others alluded to a prolonged period of “exceptionally low levels of the federal funds rate for an extended period.” Prior to raising the target rate, Fed officials are likely to wait until after programs meant to boost credit and liquidity reach their end in Q1 2010. This includes $1.25 trillion in agency mortgage-backed securities and approximately $175 billion in agency debt, as well as other initiatives including funding and lending facilities. Trading action in Fed Funds futures imply that June 2010 may be the first meeting in which an increase of any sort is foreseen by a majority of investors. Despite speculation, a decision to raise rates will be contingent on whether the FOMC revises higher its expectations on growth and inflation. Certainly, inflation fear remains suppressed although the core CPI, a commonly used gauge for price growth, has crept up to 1.7% in October from a low of 1.4% in August.

Bank of Canada Rate Decision Outlook:
Bank of Canada officials have maintained borrowing costs at 0.25% on concerns that the appreciation of the Canadian dollar may offset the recent rebound in economic activity.  After the central bank’s October policy meeting, forecasts were adjusted slightly higher for economic growth through 2009 and expansion for 2010 was forecast at 3.0 percent.  Price levels, however, are expected to remain below the 2% inflation target into 2010 so hawkish policy is unlikely at this time.  Investors are not pricing in any chance of a rate hike according to Credit Suisse overnight index swaps and Governor Mark Carney remains committed to the current low rate through the second quarter of 2010.

European Central Bank Rate Decision Outlook:
The Governing Council has kept the ECB rate at 1.00% for the past seven months, while President Jean-Claude Trichet has cited recent economic improvements in the euro area.  Real GDP returned to growth in the third quarter following five quarters of contraction, with bank officials projecting positive real GDP growth in 2010 and 2011.  Despite this positive forecast, the market currently prices in no expectation that the ECB may move rates 25 bps at the next meeting.  This is likely due to the ECB declaring that the outlook remains subject to “high uncertainty” and “low inflationary pressure” over the medium term.  However, President Trichet may be preparing for a future rate hike after the ECB’s decision on December 3 to end long-term emergency loans and tighten the terms of its final 12-month tender.

Bank of England Rate Decision Outlook:
BoE officials have maintained the benchmark rate steady at 0.50% for eight consecutive meetings and voted to increase its £175 billion asset purchase program to £200 billion.  The UK’s economic recovery has struggled to gain footing as GDP contracted 0.4% in the third quarter and the jobless rate sits at 7.8%.  According to central bank officials, “financial conditions remain fragile” as lending remains tight and spending still weak.  Market participants currently price in no expectation that the BoE will hike rates by 25 bps at the next meeting as the economic recovery looks to gain traction and price levels remain tepid.  Looking forward, however, the market expects a 69 bps increase in the benchmark rate as the central bank has concerns that inflation will rise in the medium- to long-term.

Swiss National Bank Rate Decision Outlook:
The Swiss National Bank has maintained its target rate at 0.25% (with a range between 0.00% and 0.75%) for a full year as the economy was struggling to recover and price levels remained low.  In the third quarter, however, Swiss GDP grew 0.3% after yearlong contraction.  Investment rose by 3.4% in the third quarter, its largest increase since 2003, and exports climbed 2.6% after falling 2.2% in the second quarter.  Exports, essential to the Swiss economy due to weak domestic demand, rose thanks to improving economic conditions for European trade partners and a stabilized Swiss Franc.  Looking ahead, the SNB will likely be slow to raise rates due to concerns over weak consumer demand and rising unemployment.  There is currently no market expectation of a rate increase at the next meeting and only a 31 bps increase over the next twelve months.

Bank of Japan Rate Decision Outlook:
In an unscheduled move in December, Bank of Japan official decided to ease monetary policy further with the introduction of a new funding operation of three month loans expected to reach a maximum size of ten trillion yen. The key rate has been held at 0.10% since the end of 2008, and given the central bank’s tendency in the past, along with persistent deflation; an increase is not expected in the year ahead. Indeed, core CPI in October posted a fall of 1.1%, the largest contraction in prices since recording began in 1971. Another factor hampering rate hike expectations is economic growth, with GDP up just 1.2% in preliminary third quarter readings while bank lending slowed to a 1.9% annual increase.

Reserve Bank of Australia Rate Decision Outlook:
The RBA shows few signs of slowing down its tightening policy as the central bank raised the cash rate for a third consecutive time in December. The decision to increase the rate by twenty five basis points to 3.75% came amid significant improvements to the economy, one of few major nations that narrowly avoided recession. To their credit, Governor Stevens cites regional financials with lower toxic assets that enable quicker recovery in credit markets. Also supporting growth has been the A$42 billion in fiscal stimulus. The OECD now expects the economy to expand 0.8% in 2009, and while inflation remains a concern, the RBA stated that recent “material adjustments” will consumer prices in check. Consequently, investors’ expectations for rate hikes have declined sharply, from 12-month expectations of 216 basis points increase to 102 basis points early in December.

Reserve Bank of New Zealand Rate Decision Outlook:
Since lowering the official cash rate to 2.5% on April 30, 2009, the RBNZ has refrained from raising the key rate even as GDP climbed for the first time in over a year. The economy grew in the second quarter at a 0.1% pace, with further expansion possible as retail sales climbed for in the third quarter. While neighboring Australia began to tighten rates to avoid an inflation threat, Governor Bollard of New Zealand sees no cause for concern as CPI remained below two percent in the past two quarters. Market participants have pared their bets, expecting 163 basis points of increase in the next twelve months, down from expectations of 235 basis points in late October. Ultimately, the bank has remained adamant in its latest meeting with no intention to change the OCR “until the second half of 2010″.

Written by James Russell and Roman Kadinsky, CFDTrading Research

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